EUR 850.00 For Business Accounts Only

Morningstar | Shifting Sands at UBS and Santander

The obvious inference one could draw from the appointment of the current head of UBS' investment banking business, Andrea Orcel, as CEO of Santander is that UBS is pulling even further away from investment banking and that Santander might have designs on increasing its investment banking presence. This might be too simplistic. While we do believe this is further confirmation of the reduced importance of investment banking to UBS, we would be surprised to see an aggressive expansion of Santander's investment banking franchise. Far more likely, in our view, is that Orcel has been appointed to take an investment banking, deal-making mindset to restructuring Santander and unlocking shareholder value. Orcel's history as an advisor to Santander on past corporate actions lends credence to this view.

This might be one of those rare instances where this development could be positive for both UBS and Santander. The market is likely to reward UBS if it takes a more aggressive approach to reducing its investment banking presence, while it would also view a more streamlined and focused Santander positively. We maintain our narrow moat ratings for  both UBS and Santander. Likewise, we maintain our fair value estimates of CHF 20 for UBS and EUR 5.30 for Santander.

Historically, there has been media speculation of an internal power struggle at UBS between those who argue to pull back even further from investment banking to focus on stable and profitable private banking and wealth management and those led by Orcel, who believe investment banking remains core to UBS and that UBS should be more aggressive in responding to the weakness of some of its main European competitors. Orcel's departure will come as a blow to the latter group.

Some investors have argued that the market needs to apply a conglomerate discount to the valuation of Santander. Such a discount would be to punish the group for what some view as an overly diversified business with little clarity around the synergies among different business units. We ourselves have previously stated our doubts about Santander's U.K. business (the old Abbey National) and its 70% interest in separately listed Santander Consumer USA. The U.K. business has its roots as a building society and therefore has a significant low-margin mortgage loan book with a funding structure tilted towards more expensive term funding and a lower portion of cheap and sticky current account funding. SCUSA's business is dominated by subprime auto loans, which we believe increases the overall risk premium for the group.